Taxes
Bush’s tax advisers want big changes to the income tax code, both for individuals and for companies. The nine-member panel charged by Bush with recommending changes has until July 31 to report. But members already know that tweaking won’t be enough.

The panel will offer several options, giving Bush plenty of political cover and letting him put his own stamp on a plan.
All the options will stress simplicity, allowing for fewer deductions and tax brackets.
All would tax investment income less.
And all would end or revamp the alternative minimum tax, the AMT, which has become an unintended tax increase for many in the middle class.

The commission will also recommend some kind of consumption tax, probably a national sales tax, to raise much-needed additional revenue.
Other likely recommendations: Make recent tax cuts permanent, eliminate the estate tax, reduce deductions for state and local taxes, and expand the current Earned Income Tax Credit for the working poor.

Bush will work hard to win approval for the plan. By fall, he’ll have shifted his efforts from revamping Social Security to taxes. He’ll see tax reform as his best shot for a domestic policy legacy.
But overhauling the system means choosing winners and losers. Fierce lobbying will slow action. Change will take time ... probably years.

The catalyst that may help Bush get the job done: The AMT. It’s almost a flat tax, with only two brackets. The first $175,000 of AMT income is taxed at 26%, with a 28% rate for all income over that. Couples get a $58,000 exemption, but many regular deductions are nixed, including state taxes, some medical, and most miscellaneous expenses. Mortgage interest is restricted, and there are no personal exemptions.
The AMT’s reach will zoom if nothing’s done. Because its brackets and exemptions aren’t indexed to inflation, more people get hit each year. The tax will ensnare 11.6 million households in 2006, up from 3.4 million this year. By 2010, it’ll nab half of taxpayers making $75,000-$100,000.

2001 and 2003 rate cuts add to the problem, lowering tax liability of middle-incomers under the regular schedule until the AMT kicks in.

Lawmakers have to tackle the AMT ... not this year, but soon. If they don’t kill it, they’ll at least index brackets and exemptions.
When they do, odds of a sales tax may go up. Just indexing would forgo hundreds of billions in federal tax revenue. That money will have to be made up somewhere or deficits will soar out of control.

The economy
There’s no need to worry about a revival of stagflation, despite accelerating inflation and weak economic gains for March. That combo hobbled the economy in the 1970s, when double-digit inflation led the Federal Reserve to boost interest rates despite a lagging economy.
Inflation IS picking up, but not alarmingly. We still see the CPI, the Consumer Price Index, actually slowing this year to 2.8% from 3.3% last year. However, the closely watched core CPI, which excludes energy and food prices, is likely to creep from 2% last year to 2.2% this year.

The economy is downshifting, not sputtering. Growth of about 3.5% is still the best bet, led by a solid business sector. The silver lining to modest inflation is that it means more firms are raising their prices, boosting profits, and increasing funds available for hiring and investing.
The Fed will tread a narrow path between tempering inflation and sustaining the economy. It’ll continue a series of gradual rate hikes, with another quarter-point increase in May, the eighth in 11 months.

Corporate profits will continue to fuel mergers and acquisitions. Companies on the prowl have plenty of cash on hand and won’t be deterred by a sluggish stock market, which would slow deals paid for with stocks.
All told, deals worth $1 trillion will be inked this year. That’s up from $830 billion last year and nearly double 2003’s total, but well below the $1.7 trillion in 2000 ... the apex of the dot-com boom.
Leading sectors in merger mania will include energy, cable TV, tech (led by software), telecommunications, health care, and retailing.

Selling
Major credit card firms are raising transaction fees by 5% to 25% over current rates. Most retailers won’t get any advance notice of the increases. They’ll just appear on bills from Visa and MasterCard, which say the hike is necessary to cover antifraud measures and higher processing costs.
Hardest hit will be small retailers ... gift shops, florists, beauty salons, etc. They pay higher transaction fees than big chains and can’t pass the added burden on to customers through higher prices. Many are already squeezed by competition from Wal-Mart, Target, and others.
Remedies are few. Stores could increase the minimum purchase for charges, but that could turn off consumers who dislike using cash.

New types of businesses will buoy franchising. Sales volume will hit $1.4 trillion by decade’s end, up from $900 billion in 2005. And no longer will franchising be dominated by hotels and restaurants. As baby boomers age, there will be more opportunities for niche services, including elder care, home repairs, wine classes, and home-cooked meals.

Merchants will be liable for rebate lapses by product vendors. The Federal Trade Commission ruled that CompUSA had to honor rebates on QPS products it sold, even though QPS was the one that was negligent.
The crackdown on rebate fraud follows a surge in complaints about unpaid rebates. They rose 20% last year after doubling in 2003.

Testing new e-commerce sales pitches is a lot easier now.
A system from SiteSpect lets marketers try out their sales ideas without the hassle and cost of reprogramming. The system allows tests to be added to Web pages, which can be easily restored after the test. Retailers can experiment with bigger photos, more-detailed descriptions, and instant discounts to see which help improve sales and which don’t.

© 2005 The Kiplinger Washington Editors, Inc.